Japan’s part-time landowners are overestimating single-tenant needs

In an effort to cut costs, electronics maker Sharp has announced that it is transferring its struggling liquid crystal display business from factories in Kameyama, Mie Prefecture, to factories in Sakai, Osaka Prefecture. In 2004, the Kameyama facility started making large LCD screens for TVs and more workers were hired. Sales of TVs have since plunged, and as of March the number of Kameyama employees had been cut by 30 percent. The move to Sakai will reduce the number even more. This loss has been devastating to the city, whose government subsidized the factories to the tune of ¥13.5 billion. The real estate market has suffered as a result. Sharp employed contract workers and did not build housing for them, so developers convinced landowners in the city to build rental units with promises of big profits. Now most of these one-room apartments are vacant and the landlords still have 20-plus years left to pay off their mortgages.

Kameyama exemplifies a larger housing situation that became apparent in 2008 when the Ministry of Internal Affairs conducted its most recent real estate survey (The next is scheduled for 2013). The ministry found that there were more than 7.5 million unoccupied houses and apartments representing 13 percent of all residences in Japan. That number has surely risen in the meantime, since the number of new housing units going on the market has hovered around 800,000 a year. According to the business journal Diamond Online, if that amount remains the same and population contraction continues apace, then in 20 years 24 percent of all residences will be vacant. Even if the number of new homes is halved and that of already-vacant homes being demolished is doubled, the vacancy rate will be 15 percent.

The media focus has been on vacant single-family homes, the number of which is on the increase because so many owners die without heirs who are willing to assume the title. If such houses aren’t put up for sale they become firetraps and eyesores, so local governments want them torn down. But these houses account for a small percentage of vacant residences. The largest portion by far, almost 55 percent, is made up of rental properties, mostly apartments.

In 2008, 18 percent of rental properties were vacant, and some real estate experts now estimate the portion to be as high as 23 percent — in Fukui Prefecture alone the rate is 46 percent. The reason, as exemplified in Kameyama’s case, is oversupply due to predatory business practices and shortsighted public policy. Ideally, the vacancy rate for rental properties in a particular market should be about 10 percent, since it allows for free movement of users. If the vacancy rate were 0 percent you’d have a situation like that in former communist countries where people waited years for housing. But 18-23 percent is too high for landlords to make a living. In the United States the vacancy rate has never risen above 12 percent.

Japan’s official housing policy is exclusively geared toward home ownership, which means incentives go toward construction of single-family houses. However, there is also an incentive for landowners faced with huge tax bills because of underutilized properties. Many of these people are farmers who have land but don’t use all or any of it for agriculture. Property taxes on farmland are low, but when a local government decides to develop a certain area it will designate it as shigaikakuiki, or an urbanization promotion area. Since the early 1970s, farmland that has fallen within these areas has increasingly been deemed residential land, which is taxed at a much higher rate. The idea is to encourage landowners to sell or develop their properties, but many farmers, as well as other suburban and rural landowners, may want to hold on to their land, and they can avoid the heavy property and inheritance taxes if they erect rental apartments, which also provides them with deductions on their income taxes for mortgage interest and depreciation.

The website for Sekisui Heim offers a classic plan for a four-unit apartment building that only costs ¥23.5 million to construct (not including expenses for paperwork, insurance, infrastructure and handling fees). If the new landlord charges ¥60,000 a month for each unit he earns an annual revenue of ¥2.88 million, and with a loan of 2.3 percent he makes mortgage payments of ¥1.24 million a year, thus leaving him ¥1.64 million in “profit.” Of course, this scenario only comes true if all four units are occupied all the time, and doesn’t take into consideration maintenance costs.

Most of these landowners are not savvy about investments, so they are open to sales pitches from companies such as Sekisui, Daito and Leo Palace 21, whose business is construction. These companies often sweeten the deal by managing the apartments for the landlords after construction is completed, taking a cut for themselves in “sublease” agreements. In Japanese, the term “apāto” traditionally means a small one- or two-room unit in a wooden building that is no more than two stories. The ones built nowadays are more sophisticated, thus qualifying for the euphemistic label “chintai manshon” (rental mansions), but they are still cheap to build since they are prefabricated.

Tenant turnover for one-room apartments is typically higher than it is for other rentals because they are considered entry-level residences for young singles embarking on careers or temporary housing for blue-collar workers. Professional landlords prefer long-term tenants, but higher turnover may be more appealing to small-scale landlords. The Rental Land and Rental Housing Law makes it difficult to evict tenants, and part-time landlords want to be able to liquidate their properties quickly. The reason they built the apartments in the first place was to avoid taxes and make a little money on the side, but if their tenants are families or people who plan to make homes of their residences, it becomes difficult to force those tenants to leave when the owner suddenly wishes to sell the land.

This business model has been in place for several decades. As urban areas increased in size, private landowners continued to build cheap apartments, the result being a glut of one-room units in areas that are losing population. On the other hand, in many areas there is a shortage of larger, better-quality rental properties for couples and families who can’t afford to buy homes. Construction companies continue to push the one-room model on landowners by saying that while Japan’s population is shrinking, the number of single-person households is increasing, implying that the market for one-room apartments will expand. But this trend is not the same as the one that initially gave rise to the need for small apartments, especially since much of the manufacturing that made urbanization possible has vanished from regional hubs.

Moreover, as the population of young people dwindles and the lifetime employment system disappears, the demographic of renters is changing. More people are living alone well into old age, but Diamond reports that most landlords say they don’t want to rent to elderly people. Given the shrinking market for one-room apartments, they may not have a choice.